OTW #36: Bullish on small-cap oil stocks, Corporate bankruptcies are rising, and more
Important financial stories to check out over the weekend
Hi Antagonist subscribers,
Welcome to another issue of Over the Weekend.
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1. Demystifying U.S. treasuries.
What’s the difference between treasury bills, notes, and bonds?
Check out this helpful cheat sheet from Ignacio Ramirez Moreno:
Ignacio also provided this summary:
Treasury Bills: maturities of 1 year or less.
Treasury Notes: maturities of 2-10 years.
Treasury Bonds: maturities of 20 or 30 years.
TIPS: protect against inflation.
FRNs: interest rates reset quarterly.
“Marketable” means you can sell them before maturity.
Antagonist’s take
Long-term bond prices have been beaten up lately. The iShares 20+ Year Treasury Bond ETF (TLT) is approaching 52-week lows, but this could be a solid buying opportunity.
Credit conditions are deteriorating, and September might bring the credit event that has been brewing for months.
Generally speaking, when stock investors get spooked, they rotate money to bonds. That would be good for TLT and other treasury ETFs.
There is some risk, however. Rising interest rates are bad for TLT. (Interest rates and bond prices move in opposite directions.) And there’s still room for TLT to fall from here.
If you're going to open a trade, start with a small position, and manage it tightly.
2. Bad for pump prices. Good for small-cap oil stocks.
Saudi Arabia announced it will extend its voluntary cut of 1 million barrels of oil per day for 3 months to include October until the end of December 2023. The production cut began in July, which partially explains the recent increase in oil prices.
U.S. consumers are already feeling the pain at the pump. Unlike the last couple years, however, the US Strategic Petroleum Reserves (SPR) won’t be able to do much to suppress gasoline prices. (That’s not why it exists anyway.)
The SPR is at its lowest level since 1983. It’s dropped about 43% in just the last 2 years (source: The Kobeissi Letter)
Antagonist’s take
All of this is bullish for small cap oil stocks. They’re trading at extremely low valuations, but more importantly, they’re sitting on oil reserves.
In the April issue of the Blend Portfolio, I explained why these stocks are so appealing. Here’s a portion of what I wrote then:
When you compare the amount of natural gas and oil that smaller companies have in relation to the size of their market cap, they become prime targets for acquisition.
Think it from the perspective of the oil majors like ExxonMobil and Chevron.
It’s already extremely difficult and expensive to explore and find new assets/reserves. When you factor in the negative sentiment from politicians, the general public, and banks, you have a regulatory nightmare on your hands as well.
Since that’s the case, why even bother with exploration?
It’s much easier and cheaper to buy a smaller company that has tremendous reserves relative to its market cap.
In light of this, I recommended 2 small-cap oil stocks to premium members. Both are beating the S&P 500, with one of them tripling the performance of the index.
You can read the full recommendation and view the entire Blend Portfolio by becoming a premium member. Try it for free for 7 days, and see if you’re eligible for a discount too.
3. Corporate bankruptcies are rising.
So far in 2023, over 400 corporations have gone under. Corporate bankruptcies are rising at the fastest pace since 2010 (barring the pandemic), and are double the level seen this time last year.
(source: Visual Capitalist)
Antagonist’s take
In the Aug. 26th edition of OTW and in our subscriber chat last week, I said that multiple data points are suggesting that a credit event is near. (A credit event is when a negative “event” affects a borrower’s ability to repay debt, which often leads to default.)
This year’s pace of corporate bankruptcies is yet another area of concern. Therefore, if your portfolio only consists of stocks, I urge you to diversify.
In last week’s OTW, I shared a chart that shows how different asset classes are correlated with one another. You can use it to get ideas on which types of investments you should consider outside of equities.
4. The new status symbol…
I admit that this issue was a bit heavy on bad news. So, let’s at least try to have some fun with the depressing headlines.
According to Wall Street Memes, society has a new status symbol:
Last thing...
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Thank you for reading, and have a great weekend!
Jason Milton
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